intermediate Macroeconomics

timer Asked: Jun 12th, 2014

Question description

homework3 (1).pdf

Assume that we can model output demand using:
Y =
1 1−(1−s)
[G−(1−s)T + C0 + I(r)]
where I(r) = Ω−ωr Additonally assume that the Government has a balanced primary budget:
∆T = ∆G
In the short run in the following settings compare the value of ∆Y ∆G. Is it larger than 0? Is it smaller or larger than 1?
1. Suppose the economy has a central bank that fixes the interest rate at rc
2. Suppose there is no speculative demand for money, ie Quantity Theory holds. That is M P V = Y
3. Suppose have standard money demand equation :
V [r + πe]γ = Y
Suppose a country has a positive debt to nominal gdp ratio ( b > 0) that isn’t increasing overtime. This implies that the primary deficit to nominal gdp ratio satisfies : −d r−gy = b
additionally assume r > gY . There is news that the population growth rate in the country is expected to become negative. Given this news, how does gY change? (Hint: in standard solow model what is the steady state growth rate of (non-per capita) gdp, Y?) Given this is the debt to nominal gdp ratio growing or falling after the news? If this causes the risk premia to change, what happens to r ? What does this do to the growth of the debt to nominal gdp ratio?
Under Full Ricardian Equivalence in the short run. Does a decrease in taxes : • increase investment? • increase private savings (Y -T - C) ? • cause Y to increase?
What is the condition on the primary deficit to nominal gdp ratio in order for country to be solvent ( that is, ∆b ≤ 0) when taking seignorage into account?
In the short run , accounting for the marginal propensity to invest η , is it possible that government spending in a closed economy can finance itself? What if η = 0 ? Is it possible for goverment spending to pay for itself in the short run in a fully open economy?
Suppose that the exchange rate from e is 10euro dollar . In addition assume the nominal exchange rate in the US is 10% . If the nominal interest rate in Germany is 7% and the exchange rate next period will be 1:1, where would you invest? For which exchange rate next period would you be indifferent about where to invest?
7 Compare the Effects of Fiscal Stimulus (G ↑) in flexible and fixed exchange rate fully open economies in both the short and medium run. What happens to
In the fully open economy what happens to
in the short run if inflation expectations fall?
If a country has persistant trade deficits ( Nx < 0) what is happening to the capital account? What effects could this have on interest rates?
Compare the effects of an increase in exporter sentiment, Xs in the partially open economy model with a central bank. First, assume the central bank is fixing an interest rate r = rc. How does r,e,Y,Nx,M P change in the short run? Compare this to the results if instead of fixing an interest rate, the central bank fixes an exchange rate in the fully open case.
Assume consumers live for two periods. Each consumer has an income of 10 in each period. Finally assume that the real interest rate, r = 1/2. Let Consumer A be a keynesian consumer with s = 1/2 and autonomous con- sumption C0 = 5 Let Consumer B, follow the pernament income hypothesis and attempts to smooth consumption so that they are as similar as possible in both periods (re- call from lecture that this means ρ = r, also pernament income here is simply Y1 + Y2 1+r ) (Hint : use the following to solve for Consumer B’s consumption: 1) C2 C1 = (1+r) 1+ρ 2) C1 + C2 (1+r) = Y1 + Y2 (1+r) ) Compare the changes to consumption in period one and two in the following scenarios:
1. Income doubles today.
2. Income doubles tomorrow.
3. Income today increase by 5 and decreases next period by 7.5
4. The interest rate falls to 1/4 , assume ρ = 1/2 still. repeat 1,2,3 when Consumer B can’t borrow so that C1 ≤ Y1.

Tutor Answer

(Top Tutor) Studypool Tutor
School: Cornell University
Studypool has helped 1,244,100 students
flag Report DMCA
Similar Questions
Hot Questions
Related Tags

Brown University

1271 Tutors

California Institute of Technology

2131 Tutors

Carnegie Mellon University

982 Tutors

Columbia University

1256 Tutors

Dartmouth University

2113 Tutors

Emory University

2279 Tutors

Harvard University

599 Tutors

Massachusetts Institute of Technology

2319 Tutors

New York University

1645 Tutors

Notre Dam University

1911 Tutors

Oklahoma University

2122 Tutors

Pennsylvania State University

932 Tutors

Princeton University

1211 Tutors

Stanford University

983 Tutors

University of California

1282 Tutors

Oxford University

123 Tutors

Yale University

2325 Tutors